duke energy duk_10/30/03a
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PREPARED REMARKS AND Q&A Q3 2003 Duke Energy Earnings Conference Call October 30, 2003
C O R P O R A T E P A R T I C I P A N T S Greg Ebel Duke Energy Corporation - VP, Investor & Shareholder Relations
Rick Priory Duke Energy Corporation – CEO & Chairman
Robert Brace Duke Energy Corporation – Executive VP & CFO
Rob Ladd Duke Energy Corporation - President, Duke Energy North America
Fred Fowler Duke Energy Corporation – President & COO
Ruth Shaw Duke Energy Corporation - President, Duke Power
David Hauser Duke Energy Corporation – Senior VP & Corporate Treasurer
C O N F E R E N C E C A L L P A R T I C I P A N T S Ashar Khan Foresight Investment - Analyst
Dan Eggers Credit Suisse First Boston - Analyst
Kit Konolige Morgan Stanley - Analyst
Paul Patterson Glen Rock Associates - Analyst
James Pringle Giovine Capital Group. - Analyst
Maureen Howe RBC Capital Markets – Analyst
Ali Agha Burnham Securities – Analyst Jay Dobson Deutsche Bank - Analyst
Carol Coale Prudential Securities - Analyst
P R E S E N T A T I O N
Operator
Good day, everyone and welcome to the Duke Energy third quarter earnings conference call. This call is being recorded. At this time for opening remarks, I would like to turn the conference over to the Vice President of Investor and Shareholder Relations for Duke Energy, Mr. Greg Ebel. Mr. Ebel, please go ahead sir.
Greg Ebel - Duke Energy Corporation - VP, Investor & Shareholder Relations
Good morning and thank you for joining us. With me today are
Duke Energy’s CEO Rick Priory, our COO Fred Fowler, CFO
Robert Brace, Rob Ladd, who is President of Duke Energy North
America and David Hauser, our corporate Treasurer. Today we
will provide you with an overview of Duke Energy’s third quarter
results. This call is being webcast on our website at www.duke-
energy.com and a copy of the slides is available for download in
the investor section of our website. Before we begin, I‘d like to
review our Safe Harbor Statement:
Some of the things we will discuss in today's call concerning future
company performance will be forward-looking statements within
the meaning of the securities laws. Actual results may materially
differ from those discussed in these forward-looking statements,
and you should refer to the additional information contained in our
SEC filings concerning factors that could cause those results to be
different than contemplated in today’s discussion.
In addition, today’s discussion may include certain non-GAAP
financial measures as defined under SEC Regulation G. In such an
event, a reconciliation of those measures to the most directly
comparable GAAP measures will be made available on our
investor relations website at www.duke-
energy.com/decorp/gaap.html. We will begin today’s call with
our prepared remarks and then open the lines to take your
questions. I will now turn the call over to Mr. Priory.
Rick Priory - Duke Energy Corporation - CEO & Chairman& Chairman
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PREPARED REMARKS AND Q&A Q3 2003 Duke Energy Earnings Conference Call October 30, 2003
DENA continues to face challenges and adding to the problem of
over-capacity in the industry, was adversely affected by mild
weather and low regional spark spreads in the third quarter. Rob
Ladd will drill through some of the specific aspects of the third
quarter and the actions we’re taking, as well as our outlook for the
fourth quarter.
Good morning. Thanks for being with us. Condolences to our
friends in New York on the World Series outcome. The Yankees
played hard!
I’m a big baseball fan, and many years ago had the chance to try
out for the other New York team -- the Mets. I didn’t win a spot on
that team – but I did win a lifelong zest for the thrill of
competition!
Lower than expected results at DENA will cause full-year EPS to
fall below our previous guidance and your current expectations.
Today we project full-year EPS to be in the range of $1.20 to $1.25
per share, excluding special items and the cumulative effect of
accounting changes.
I’m retiring this week from another wonderful game, and it’s with
mixed feelings that I host my last earnings conference call with
you. I have taken great pride in reporting on the progress of Duke
Energy – even during the challenging times we’ve faced. I’ve
done my best to address your tough questions with the degree of
candor and detail that all of our investors deserve. This group isn’t
known for throwing softballs, but I’ve enjoyed the calls, one-on-
ones and conferences!
As you know, we have focused relentlessly on shoring up our
balance sheet:
• For the year, we’ve generated gross proceeds of $1.9
billion from the sale of non-strategic assets.
• We have reduced nearly $1.7 billion of net debt and
trust preferred securities for the first nine months, and
by year-end we expect to meet our target of $1.8 billion
in debt reduction at Duke Energy.
Duke Energy is a great company that has been greatly challenged
of late. I’m looking forward to watching its comeback season – not
from the pitcher’s mound, but as a devoted fan and owner cheering
from the bleachers. • We have significantly reduced our capital spending to
$2.8 billion -- $400 million lower than our original
forecast of $3.2 billion.
I know this is the quarter you’ve been waiting to hear about – so
let’s get right to it: • Our liquidity position is strong, with $1.8 billion in
cash and cash equivalents on hand at September 30th.
You were expecting to see a great third quarter from us – and we
were expecting to deliver one. We didn’t get to where we had
hoped to be, as you’ve seen from the financials we released this
morning. Energy markets are a tough place to play right now. But
throughout the third quarter, Duke Energy has worked hard to
strengthen our business and resize it to market realities. We’ve
made good headway – and we have more work to do.
We are dramatically reducing our cost structure in response to the
industry downturn. This quarter we’re implementing labor
reductions and other expense reductions that will yield more than
$200 million in annual pre-tax savings, beginning in 2004. We’re
reducing our workforce further, by about 8 percent. The majority
of those reductions will be complete by year-end, and you’ll note
that we took severance charges totaling $105 million, or 8 cents a
share, for the third quarter.
For the third quarter, we reported GAAP earnings of 5 cents per
share, or $49 million, in net income. Ongoing earnings per share
for the quarter were 35 cents, excluding special items.
I want to point out that our rigorous cost management efforts
began well before this latest round of cuts. We have steadily been
pursuing savings and efficiencies across every line of our
organization, and since fourth quarter 2002, we have implemented
approximately $400 million in total annualized cost reductions. We
have significantly scaled back our total workforce, and when fully
implemented, we expect employee reductions to total
approximately 3,400. These reductions include 1,500 personnel
Duke Energy Gas Transmission, Duke Power, Field Services and
Duke Energy International generally performed well, even in the
face of challenging market dynamics, a weak economy and less
than desirable weather conditions. Robert will run through the
numbers with you shortly.
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PREPARED REMARKS AND Q&A Q3 2003 Duke Energy Earnings Conference Call October 30, 2003
Duke Energy reported earnings of 5 cents per share for the third
quarter of 2003, which included 30 cents in special items which we
will cover in more detail in just a minute. Earnings for the third
quarter of 2002 were 27 cents per share and included charges for
special items totaling 24 cents per share.
associated with our workforce reduction in 2002 and an additional
1,900 employees related to the cost reduction plan announced
today.
We have taken disciplined action to reposition Duke Energy going
forward. The work hasn’t been fun or easy. But the best medicine
isn’t supposed to taste good – it’s supposed to make you feel
better. I do believe we’re on the road to recovery, but market
signals tell us it won’t be a short road. As a company, we believe
deeply in the value of our product and our obligation to serve
employees, customers and shareholders. We’ll adhere to the
regimen of bitter medicine and tough decisions as long as it takes
to restore the health of our company.
On the positive side. Most of our business segments delivered
solid results for the quarter and the year to date. These businesses
include both of our regulated operations – Franchised Electric and
Natural Gas Transmission – and two of our unregulated businesses
– Field Services and International Energy.
On the downside. Weather had a negative impact on power sales
in our Franchised Electric business as well as DENA. Weather in
the Carolinas, as measured in cooling degree days, was 16% below
normal this quarter and 21% below actual cooling degree days for
the third quarter last year. And mild summer weather across most
of the U.S. reduced demand for power from our merchant
generation fleet.
I know that my successor, Paul Anderson, is committed to that
same course, and he’ll do a great job in leading Duke Energy
forward. Now I know you’re eager to hear about our plans for
2004. Paul will be reviewing plans for 2004 over the next few
months and I suspect he’ll be in a position to share his thoughts
with you in early 2004.
DENA continues to suffer from the over-supply of merchant
generation and low spark spreads which have precluded many of
our facilities from generating cost-effective power. For the most
part, our Western facilities have been running as planned this
summer while our facilities in the East have not run as much as
expected. Our facilities in NEPOOL are called to dispatch more
often than the other regions in the East.
I am optimistic about next year. We do expect to see
improvements generated from the cost reduction initiative I just
mentioned, and from the continued reduction of debt on our
balance sheet. We will continue to work tirelessly to wring all of
the costs we can out of our operations. Of course given that Paul
takes the helm on November 1st, to say more about 2004 at this
time would be inappropriate. So we won’t be giving you any
specifics today regarding 2004.
During the quarter, DENA took a $254 million charge for goodwill
impairment primarily related to the reduced scope and scale of
Duke Energy Trading & Marketing’s business and the continued
deterioration of market conditions affecting DENA’s operations.
I began with a baseball analogy, so I’ll close that way as well: I am
immensely proud to have worn the Duke Energy jersey for nearly
28 years, and to be a part of the best team in the energy league.
As a part of our cost reduction efforts across the company, Duke
Energy incurred approximately $105 million in severance costs
during the quarter. And you can expect additional severance costs
in the fourth quarter which could be about $30 million. Annual
cost savings related to the workforce reduction will be at least
$150 million. I’ll go into more detail later on all of our expected
cost savings.
In a few moments we will address your questions, but I’ll thank
you in advance for your interest in Duke Energy – and for making
my life interesting, quarter after quarter!
With that, let me turn things over to Robert…
Robert Brace - Duke Energy Corporation – Executive VP & CFO
Duke Energy reported higher interest expense in the quarter
primarily as a result of the reclassification of the trust preferred
securities of $24 million from minority interest to interest expense,
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PREPARED REMARKS AND Q&A Q3 2003 Duke Energy Earnings Conference Call October 30, 2003
lower capitalized interest of $33 million as compared with last
year’s third quarter and a $16 million write-off of capitalized debt
costs resulting from a settlement with the South Carolina utility
commission.
Severance costs for DENA, DEI and corporate-level employees
totaled $41 million, or 4 cents per share.
Duke Capital Partners wrote down assets held for sale by $23
million, or 2 cents per share.
Lower income taxes resulted from a $52 million tax benefit which
was previously unavailable to the company. This benefit is
associated with the goodwill impairment taken in the fourth quarter
of 2002 related to our European trading business.
And lastly, the previously mentioned tax benefit associated with
last December’s goodwill write-off at DEI contributed $52 million,
or 6 cents per share.
Taking into consideration the lackluster earnings from DENA’s
ongoing operations, we expect 2003 annual earnings per share for
Duke Energy will fall short of our original guidance. As Rick
mentioned, we now anticipate earnings per share to be in the range
of $1.20 to $1.25 per share, before special items and cumulative
effect of accounting changes.
For the third quarter 2003, Duke Energy reported consolidated
earnings before interest and taxes of $352 million.
During the third quarter, Franchised Electric increased its North
Carolina Clean Air amortization expense by $35 million for a total
of $53 million. We may also increase the amortization for the
fourth quarter by a similar amount. Assuming we take this
additional amortization expense, Franchised Electric’s EBIT for
the year will likely be between $1.5 billion and $1.6 billion.
Now let me turn to the special items that occurred during the
quarter.
We recorded a number of special items in the quarter which totaled
30 cents per share. Natural Gas Transmission continues to deliver solid results and
expects to meet its annual EBIT target of $1.2 billion despite
foregone earnings associated with certain asset divestitures which
occurred during the year.
Results for Franchised Electric were negatively affected by a
settlement with the South Carolina Public Service Commission for
$30 million, or 2 cents per share. An additional $16 million or 1
cent per share, non-cash charge to interest expense was also
included in the settlement. Franchised Electric also recorded a
severance charge of $46 million, or 3 cents per share, during the
quarter.
Of our unregulated businesses, both Field Services and
International Energy continued to deliver solid results in the third
quarter.
Field Services realized strong margins from its processing
business, especially on percent-of-proceeds contracts which
increased nearly $50 million over last year’s third quarter. And
Field Services continued to control operating costs during the
quarter which were about $20 million lower than last year.
Gains on asset sales benefited results at Natural Gas Transmission
by $30 million, or 2 cents per share, and were partially offset by
severance charges totaling $18 million, or 1 cent per share.
The settlement with the CFTC lowered DENA’s segment EBIT by
$17 million, or 2 cents per share. This amount is net of minority
interest and is not deductible for income tax purposes.
Natural gas liquids prices continued to improve over the last year
from 39 cents in the third quarter of 2002 to 49 cents in the third
quarter this year. NGLs so far in the fourth quarter have averaged
about 53 cents per gallon and we continue to see improvements in
the frac spread as well. The average frac spread was 82 cents per
MMBtu in the third quarter and we’ve seen strengthening of the
average frac spread in the region of $1.50 in October.
Net losses on asset sales at DENA reduced EBIT by $81 million in
EBIT, or 5 cents per share.
And as I previously mentioned, the non-cash goodwill impairment
at DENA totaled $254 million, or 18 cents per share.
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PREPARED REMARKS AND Q&A Q3 2003 Duke Energy Earnings Conference Call October 30, 2003
Also during the quarter, Field Services made an $87 million cash
payment to Duke Energy related to the settlement of an
intercompany obligation. This payment demonstrates the strong
cash flow position at Field Services.
Field Services continues to post successes in adding minimum fee
clauses to its keep-whole contracts in response to weak frac spread
pricing environments.
International Energy’s ongoing operations produced favorable
results for the quarter. Positive results from the Latin American
and European operations offset foregone earnings associated with
the sale of PJP earlier in the year and a $3 million severance
charge during the quarter. Third quarter 2003 results also included
a $7 million charge for environmental reserves related to prior
periods. Last year’s quarterly results included $91 million in
charges for impairments and write-downs.
Field Services and International Energy remain on track to reach
their segment EBIT goal for the year of $200 million and $250
million, respectively.
Unfortunately, segment EBIT results from DENA’s merchant
generation portfolio substantially offset the good results from our
other businesses. We’ll cover the results at DENA in more detail
shortly.
The company continues to make solid progress on its goals related
to asset sales, debt reduction and controlling costs.
Through the first nine months of 2003, we reduced our overall net
debt and trust preferred position by almost $1.7 billion at Duke
Energy. This figure includes a year-to-date increase in cash of
$894 million.
Year-to-date reductions in long-term debt, trust preferred securities
and the net pay down of short-term debt reduced debt by $3.3
billion. Total long-term debt issued over the last nine months
totaled $2.8 billion. Debt associated with the sales of Empire
Pipeline and PJP also contributed to the reduction in debt for $317
million.
I’d also like to point out that at the end of last week we completed
the redemption of $500 million in bonds which resulted in the
reduction of long-term debt with a reduction in cash. We have also
reduced commercial paper by approximately $130 million since
the end of September. Additional debt reductions in the fourth
quarter will include approximately $300 million in maturities due
primarily at Duke Capital and Westcoast Energy.
In order to fully reconcile to our net debt position on the balance
sheet as of the end of the third quarter, we must include changes to
our foreign debt balances that result from foreign currency
fluctuations. Over the last nine months, foreign currencies –
primarily the Canadian dollar – improved against the US dollar and
as such the debt balances were adjusted to reflect the currency
translation to US dollars. These translation adjustments added
about $775 million to our debt compared to year end 2002.
However, the local currency obligations remain unchanged and our
Canadian operations generate sufficient cash flow to pay the
Canadian debt as it matures.
At Duke Capital, net debt has been reduced by $3 billion excluding
the impact of currency changes.
On the subject of capex, we’ve tightened the belt another notch and
now expect our annual capital expenditures to be about $2.8
billion. This is a $400 million reduction from our original forecast
of $3.2 billion. Most of the business units trimmed their capex
plans to reach this goal.
And for the first nine months of 2003 we have announced or closed
asset sales in excess of $1.9 billion in gross proceeds.
We continue to find attractive opportunities to divest of certain
non-core, non-strategic assets. With the announcement of the sale
of Pacific Northern Gas in British Columbia we have announced a
total of $1.9 billion in asset sales and closed on more than $1.6
billion through the third quarter. As of today, we’ve closed on
$1.8 billion of asset sales – this is three times our original target for
2003.
We may have additional sales in the fourth quarter but I would
expect these to be relatively small transactions. For example, you
may be aware that we have been looking at exiting our European
gas trading business. I would expect we’d be able to make some
announcement on this transaction shortly.
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PREPARED REMARKS AND Q&A Q3 2003 Duke Energy Earnings Conference Call October 30, 2003
Total operating expenses for 2003 are now expected to be about
$732 million and clearly demonstrate the continued focus on
reducing costs across the DENA organization.
The after-tax proceeds associated with these sales are
approximately $1.65 billion.
For 2003, the impact of foregone EBIT is expected to be in the
neighborhood of $150 million. The annualized impact on EBIT
will be approximately $235 million.
Obviously given these third quarter results, $200 million in EBIT,
before special items, is well out of reach for DENA this year. We
now expect annual ongoing results to be a loss of $70 million,
excluding special items.
Next I’d like to briefly review Duke Energy’s liquidity position.
Now I’d like to turn the call over to Rob Ladd who will review
DENA’s results for the third quarter and his expectations for the
fourth quarter.
We reduced our total credit capacity from $4.7 billion at the end of
the second quarter to $3.5 billion at the end of the third quarter.
Due to the lower utilization of our commercial paper programs, we
reduced our credit facilities at both Duke Energy and Duke Capital
– more specifically, we are maintaining the multi-year credit
facilities and let both of the 364-day facilities at Duke Energy and
Duke Capital expire in August.
Rob Ladd - Duke Energy Corporation - President, Duke Energy North America
Thank you, Robert. Good morning to everyone.
I will walk you through the third quarter results for Duke Energy
North America, which includes our 60% interest in Duke Energy
Trading & Marketing.
And our outstanding balances against these facilities have gone
down slightly – approximately $200 million – to $1.4 billion at the
end of the quarter. The reported EBIT for the third quarter was a loss of $411 million
which includes the impact from the special items that Robert
covered earlier -- goodwill impairment of $254 million, net losses
on pending asset sales and assets held for sale of $81 million, the
CFTC settlement of $17 million and $5 million of severance costs.
At September 30, we had unused capacity of $2.1 billion and cash
and cash equivalents on hand totaling $1.8 billion.
As of October 27th, the outstanding commercial paper balance at
Duke Energy was $150 million and $178 million at Duke Capital. EBIT before special items was a loss of $54 million. There were a
number of causes for this loss which are highlighted on the next
slide.
At Duke Energy North America, total gross margin realized in the
first nine months of 2003 amounted to $513 million. Low-risk
gross margin totaled approximately $448 million for the year to
date. “Other Sources” of gross margin did not produce favorable
results during the quarter due to mild summer weather and low
power prices. For the year to date, Other Sources of gross margin
totaled $65 million.
This slide shows some of the more significant factors which caused
our actual results to be lower than those we anticipated earlier in
the year.
First, we incurred a $50 million loss due to negative MTM
movements and credit reserves associated with a few power tolls in
DETM. Approximately half of the loss was as a result of the
Northwestern Energy bankruptcy.
We expect to realize about $149 million in low-risk gross margin
in the fourth quarter. This will bring us to the total $600 million
we originally expected for the year from our hedged generation
sales, ancillary services and must-run revenues. Second, due to a mild summer in most of the country, we
experienced lower production and lower spark spreads. We
estimate that impacted gross margin by $40 to $60 million.
Offsetting total gross margin were operating expenses totaling
$508 million for depreciation, operating and maintenance, G&A
and minority interest expenses.
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PREPARED REMARKS AND Q&A Q3 2003 Duke Energy Earnings Conference Call October 30, 2003
Third, we have been reducing scale and scope of DETM and
DENA which has impacted our gas transportation and storage
business. We estimate an additional $20 to $30 million impact on
profitability for the quarter.
When you combine the impact of these three items, our EBIT for
the quarter was adversely affected by over $100 million.
Let me move to the plant production levels and spark spreads.
In the quarter, our generation fleet produced 9.1 million MW hours
versus an original estimate of 10.9 million MW hours, or a 1.8
million MW hour shortfall.
The average spark spread, including the benefit of hedges, was
approximately $18.46 per MW hour versus an original estimate of
approximately $20.82 or a $2.36 shortfall. For the balance of 2003
we expect continued challenged market conditions.
For the fourth quarter, we are estimating an ongoing EBIT loss of
$75 million which will bring the full year EBIT loss to
approximately $70 million before special items.
Given this negative outlook, we have taken additional steps to
aggressively take more costs out of the business. These are beyond
those already achieved so far this year.
Also, effective November 1st, we are merging our Energy
Marketing and Energy Management businesses together and
forming integrated customer focused regional teams. We believe
that the merger of our marketing and trading personnel, together
with a continued focus on the customer, will improve profitability
and reduce our long-term earnings volatility.
Given the mild weather and lower sparks in the 3rd quarter, you
won’t be surprised to hear that we have not improved our low risk
gross margin for 2004. Low risk gross margin for 2004 is in the
low $300 million range. However, you should be aware of our
progress in signing longer term power toll deals. As we have
indicated previously, securing such tolling deals has become an
increasing focus for our DENA marketing team over the past 12-18
months. In that period we have secured more than $400 million of
gross margin associated with such customer transactions. This
gross margin will be realized over the next 8-10 years. These
transactions do not require collateral and the gas supply cost is the
responsibility of the customer. While this segment of our business
takes time to grow, we think the margin from such tolls will be an
increasingly important part, and a very low risk element, of our
margin capture at DENA.
Now I’ll turn the call back to Robert.
Robert Brace - Duke Energy Corporation – Executive VP & CFO
In an effort to match operating and administrative costs to the
realities of the challenging market conditions, Duke Energy has
embarked upon a substantial cost reduction plan to reduce costs for
both labor and operations.
On the labor side, with the cost cutting plan we announced today
we expect to further reduce our total corporate headcount by 8% or
approximately 1,900 employees. These employee reductions are
being taken across all business lines and also at the corporate
levels. We expect these reductions to be substantially completed
by the end of the year.
Annual pre-tax savings related to labor costs are expected to
greater than $150 million.
During the third quarter, Duke Energy made a cash contribution to
the pension plan of $181 million.
We are also reducing costs related to procurement and supply
chain management, mostly through renegotiation of contract terms.
And we are reducing our reliance on IT contractors and lowering
our infrastructure costs.
Annual pre-tax savings related to pension expense, procurement
and IT are expected to be at least $50 million.
In summary, the third quarter did not provide the earnings we
anticipated primarily due to mild summer weather and low spark
spreads. Due to the loss in earnings at Duke Energy North
America, our expectations for earnings for the full year 2003 will
now be in the range of $1.20 to $1.25 per share, excluding special
items and the cumulative effect of a change in accounting
principles.
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PREPARED REMARKS AND Q&A Q3 2003 Duke Energy Earnings Conference Call October 30, 2003
Q U E S T I O N A N D A N S W E R While we will fall short of our earnings expectations, we have
successfully met and exceeded our goals on asset sales and capital
expenditures for 2003. We are also on pace to reduce total debt
and trust preferred securities by $1.8 billion by the end of the year.
Operator
Thank you very much, gentlemen. Our question and answer session will be conducted electronically. If you would like to ask a question, press the star key followed by the digit "1" on your touch-tone telephone. If you are joining us on a speakerphone, please be sure to use your mute function so your signal may reach our equipment. Once again that is star, "1" to ask a question. We will pause to assemble our roster.
And today, we announced a cost reduction plan that will result in
at least $200 million in annual pre-tax savings for the company.
We remain committed to the long-term financial strength and
future success of Duke Energy. We’ve taken difficult steps to
address the challenges across our businesses with the anticipation
of improving market conditions and a return to solid earnings
growth in the future.
And our first question will come from Ashar Khan with Foresight Investment. Ashar Khan - Foresight Investment - Analyst Over the next couple of months we will be reviewing our 2004
plans with Paul Anderson and we look forward to speaking to you
about those plans early in the New Year.
Good morning gentlemen. Robert, if I can just do some comparisons of what I heard, just want some confirmation of data. You mentioned that reductions to work force and O&M savings would be a positive $200 million on a pre-tax basis in 2004 versus 2003.
Well, let me thank you for your time, interest and investment in
Duke Energy. And then that the loss of EBIT in relationship to the businesses that have been sold to date on an analyzed basis would mean a further loss of EBIT of $235 million, if I heard it, but on an incremental basis, it's only $85 million 2004 versus 2003?
I will wrap up by reiterating that while the quarter, from an
earnings perspective, did not come in as we had expected we are
very pleased and bolstered by the progress we have made on net
debt reduction - reaching some $1.7B at Duke Energy and in
excess of that at Duke Capital.
Rick Priory - Duke Energy Corporation –CEO & Chairman
That's correct.
We are extremely pleased by our progress on the asset divestiture
plan where we have now exceeded our target by more than 3 times.
Ashar Khan - Foresight Investment - Analyst
And of course, the cost reduction initiative that we discussed with
you today which will provide some $200 million in pre-tax
benefits to the company in 2004.
OK. And now in relationship to funding your pensions this quarter, you had, if I remember from our June meeting or end of May meeting, you had some pension contributions in '04 and '05, so those pension contributions are no longer required.
With that, we look forward to following up with you to answer any
questions you may have over the coming days, and I and the rest of
the investor relations team are available to take your calls.
Rick Priory - Duke Energy Corporation – CEO & Chairman
That is correct.
Ashar Khan - Foresight Investment - Analyst
And as you are lowering your Capex budgets for this year, would that imply similar reductions in Capex budgets going forward?
Rick Priory - Duke Energy Corporation – CEO & Chairman
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PREPARED REMARKS AND Q&A Q3 2003 Duke Energy Earnings Conference Call October 30, 2003
Dan Eggers - Credit Suisse First Boston - Analyst We have given previous guidance on the '04 anticipated capital, and there have been considerable cuts, frankly and cost reductions that will affect that and reduce that for '04.
Good morning.
Rick Priory - Duke Energy Corporation –CEO & Chairman
Ashar Khan - Foresight Investment - Analyst
Good morning, Dan. And then, if I can just -- if I do my numbers in terms of going to DENA, to be able to meet the projections for the $75 million EBIT loss now projected for the year, if I'm right, you still have to earn gross margin in the range of about $150 million or so, for the fourth quarter.
Dan Eggers - Credit Suisse First Boston - Analyst
Rob, I hate to come back at you so quickly, but looking at your hedge position for the fourth quarter, you guys are over-committed, is that correct, at 142% in hedged positions?
And I was just trying to get some -- a little bit more feedback as to what makes you, in reference to the results announced in the third quarter, what makes you comfortable in achieving that margin?
Robert Ladd - Duke Energy North America, President
Rick Priory - Duke Energy Corporation –CEO & Chairman Yes, as September 30th, that would be accurate. As you know, these vary by quarter over the year. We're currently substantially less than that, as we go into the quarter and we're now almost at November 1st.
Rob will address that.
Rob Ladd - Duke Energy Corporation - President, Duke Energy North America Dan Eggers - Credit Suisse First Boston - Analyst Yes. That number is really just our low-risk margin that we have budgeted for the balance of the year.
So you're even or below even and you're not in a long electricity position at this point?
Ashar Khan - Foresight Investment - Analyst Robert Ladd - Duke Energy North America, President Yes, but I think you achieved that low-risk margin this time also, but you had market-to-market low gross margin losses of $60 million in the third quarter, which killed some of that off, so are you expecting no market-to-market losses in the fourth quarter?
I'm not saying that. We're lower than the 142%.
Dan Eggers - Credit Suisse First Boston - Analyst
OK. You guys tagged on incremental hedges for '04, '05 both on a hedge position and then you brought up the price a little bit in '05. Can you give us some color on what kinds of spreads you guys are locking in? Are these transactions cash flow positive at this point in time? And would they flow down to EBIT positive, for to you think through what your commitments are?
Rob Ladd - Duke Energy Corporation - President, Duke Energy North America
Yes, at this point in time, we're not expecting any, but obviously, if we had a movement that would affect it, but none anticipated at this point.
Robert Ladd - Duke Energy North America - President Ashar Khan - Foresight Investment - Analyst Yes, all of the sparks that we locked in have been positive,
certainly relative to capital. It's part of what I mentioned earlier about some of these longer-term tolls. We're able to capture more than just what the market would indicate.
OK, thank you very much.
Operator
Dan Eggers - Credit Suisse First Boston - Analyst Our next question will come from Dan Eggers with Credit Suisse
First Boston.
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PREPARED REMARKS AND Q&A Q3 2003 Duke Energy Earnings Conference Call October 30, 2003
OK, very well. And if we can just shift over, right enough to run us through what you're seeing internationally. You know you guys picked up some better contracts in Brazil earlier, and there's certainly been a lot of talk about Australia, but if you could give us a rundown of the just operation of what you're seeing kind of on the market or region basis.
Dan Eggers - Credit Suisse First Boston - Analyst
Great, thank you guys. One more, and I will let you go. What was the FX impact this quarter?
Robert Brace – Duke Energy Corporation – Executive VP & CFO
Fred Fowler - Duke Energy Corporation - President & COO The FX impact this quarter wasn't terribly significant, a few tens of millions.
Yes. I will do that. As you know, we have pretty significantly reduced our trading operations in Europe so we have that situation stabilized and doing fine. We are continuing to look at what our options are on that business. If you look at Australia, you really have most of the businesses there doing OK.
Dan Eggers - Credit Suisse First Boston - Analyst
OK, thank you.
The one that's really hurting us is the Tasmanian pipe line, and we continue to have very low through-put on that system, but the balance of those businesses are doing fine. They're primarily fairly contracted businesses. In Brazil, we've had a good year in Brazil. Although, there is currently a lot of uncertainty with the new government that's come in.
Operator
Moving on to Kit Konolige with Morgan Stanley.
Kit Konolige - Morgan Stanley - Analyst
The fact that the Energy Minister is looking at kind of a new regime for the big utility industry there. I think it's too early to know where that's going to end up. We're very actively involved in that process. Probably the biggest vulnerability we have in Brazil, is that the market continues to be fairly long at this point for two reasons.
Thanks. Good morning. Rick, what can I say? I commemorate your last conference call.
Rick Priory - Duke Energy Corporation - CEO & Chairman
That's kind of you. Does that mean you're going to throw softball? Number one, because of the rationing they went through. People have kind of stayed on that plan even though the rationing has ended. The second thing is they've had a lot of wet weather, so the reservoirs are pretty full, so you have a lot of hydropower capability.
Kit Konolige - Morgan Stanley - Analyst
Well, you know, you talked about how much you appreciated the hard questions. The other thing that was done, there was a regime that was set up
that really disadvantaged the contracting process this year – the independent power producers, and were heavily in favor of the state. There's been a big uproar over that. We're obviously working on that. It looks like one of those things that will go down to the wire.
Rick Priory - Duke Energy Corporation - CEO & Chairman
I never expect a softball. Fire away.
Kit Konolige - Morgan Stanley - Analyst In the meantime, we have another 25% of our capacity that rolls off from the original contracts this year. I think as you recall, 25% rolls off a year between 2003 and 2006. No doubt that we're at a disadvantage to the state-owned utilities on renewing contracts. So we've had a very aggressive marketing program out to new customers, industrials primarily.
I don't want to hurt your feelings that way.
Rick Priory - Duke Energy Corporation - CEO & Chairman
Thank you. Again, I think when it's all said and done, I think we will get that
25% re-contracted, and I do think it will be at prices at or near the roll off prices. The balance of South America is fairly stable at this point and doing OK.
Kit Konolige - Morgan Stanley - Analyst
Just a couple of somewhat related questions, trying to think through a little bit. Impacts of things you're doing now into 2004,
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PREPARED REMARKS AND Q&A Q3 2003 Duke Energy Earnings Conference Call October 30, 2003
so as I understand what you have described so far EBIT for DENA for this year is going to be something in the $600 million range?
When you're talking about cost cuttings and labor and other totaling $200 million, lower costs in 2004 versus 2003, then you would be saying in addition to that, you have lower debt and you have a positive variance on pensions.
Rick Priory - Duke Energy Corporation - CEO & Chairman
Rick Priory - Duke Energy Corporation - CEO & Chairman For this year? No.
Yes, that's correct. Kit Konolige - Morgan Stanley - Analyst
Kit Konolige - Morgan Stanley - Analyst I'm sorry, gross margin.
OK. Also, I noticed that the --can you describe a little bit your thinking on the acceleration of amortizing the clean air obligation in North Carolina?
Rick Priory - Duke Energy Corporation - CEO & Chairman
That's correct.
Rick Priory - Duke Energy Corporation - CEO & Chairman Kit Konolige - Morgan Stanley - Analyst
Yes, clearly, in this particular case, we had very cool weather in
the last quarter of 2002, and then the first quarter of 2003, which is in our rolling 12-months regulated return, we had exceptionally good bulk power marketing revenues that came through as a result of the high gas prices, keeping elevated prices in the east and our selling coal fired and nuclear fired excess generation into that market.
Gross Margin and then you say low $300 million range of low-risk gross margin for 2004.
Rick Priory - Duke Energy Corporation - CEO & Chairman
That's correct.
For those two quarters, we experienced considerable inflows and as a consequence, it gave us a chance to sort of accelerate, if you will, the payment for the clean air expenditures that we're going to have in the state of North Carolina, so we took that opportunity to really expense some of it out.
Kit Konolige - Morgan Stanley - Analyst
Now, of the costs, can you walk through a little bit the cost cuts that you have described so far. And in particular, I'm interested in what is the bottom line impact of the cost cuts going to be in 2004 compared to what we're already seeing in 2003.
Kit Konolige - Morgan Stanley - Analyst
Rick Priory - Duke Energy Corporation - CEO & Chairman Final question would be on operating cash flow for the year. I think you have talked about $4 billion as the target. It looks like about $2.9 billion through three quarters.
Yes, you're going to see the 2003 flow through to 2004. In the case of 2004, the incremental cost cuts are about $200 million, a little bit in excess of $200 million. About $150 million of that will come through reductions in labor expenses and about $50 million or so will come through in the category of reduced expenses in a variety of different areas.
Rick Priory - Duke Energy Corporation - CEO & Chairman
We are right now, leafing through the papers, to get that number. Hold one second. I'm looking at the treasurer and he's looking at the controller and they're both saying do you have that number.
As you know, we're reducing debt, as well, and we will see some of it flow through in that category. We made some advance pension funding decisions that would help to flow through, as well, so that's the categorization of them. The objective would be to have the full amount, or something in excess of that full amount, flowing through really beginning of January 1.
Robert Brace - Duke Energy Corporation – Executive VP & CFO
You're right, on the nine-month cash flows, you're right, $2.9 billion dollars. I don't have the full year forecast for the cash from operations line on the like for like basis, what we are able to confirm is that the pay-down debt that we told you before will happen at $1.8 billion and even more at Duke Capital.
Kit Konolige - Morgan Stanley - Analyst
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PREPARED REMARKS AND Q&A Q3 2003 Duke Energy Earnings Conference Call October 30, 2003
Rick Priory - Duke Energy Corporation - CEO & Chairman
We just don't have that number with us. The $2.9 billion is correct. As to we are into the fourth quarter, we simply do not have the numbers. We sit here despite the 32 feet of paper that we have available to us.
Kit Konolige - Morgan Stanley - Analyst
That's fine. We can circle back. I will leave you there. I hope those weren't two softball questions.
Rick Priory - Duke Energy Corporation - CEO & Chairman
Thanks Kit, I enjoyed working with you.
Operator
Before the next question, to let everyone know, if you find your question has been answered, you may remove your self from the queue by pressing the pound key. We'll now hear from Paul Patterson with Glen Rock Associates.
Paul Patterson - Glen Rock Associates - Analyst
Hello, can you hear me?
Rick Priory - Duke Energy Corporation - CEO & Chairman
Hello Paul yes I can hear you clearly.
Paul Patterson - Glen Rock Associates - Analyst
I wanted to ask you about the $200 million in cost savings and where that might show up. Specifically with what it's going be in the franchise electric and considering your earned ROEs surveillance reports that have been coming out of both jurisdictions, North and South Carolina, and you're allowed ROEs, you know, where you stand there, are you guys thinking of getting a regulatory deal of some sort, in which these ROE surveillances won't be as important?
Rick Priory - Duke Energy Corporation - CEO & Chairman
No, let me just say it again, as I described to Kit earlier, the regulatory surveillance issue comes because of a terrific fourth quarter in '02 and then likewise followed by a big first quarter of '03, and to the extent that those quarters keep repeating themselves, well, that would be wonderful, and we just have to deal with that
outcome, and I'm not so certain we will see those kinds of extraordinary quarters occurring one after another. And yes, some of the cost is coming out of the electric company. There's no question about that.
Paul Patterson - Glen Rock Associates - Analyst
So even with the ice storm, you expect to be earning under you're allowed ROE, I mean backing up the ice storm and everything that you guys had. I mean once I pick out of the ice storm. What I'm saying is that going forward, with these cost cuts and everything, we shouldn't expect you guys to earn --you're ROEs at the utilities should fall to around the allowed ROE?
Rick Priory - Duke Energy Corporation - CEO & Chairman
Well, I think our plan --we said $1.5 to $1.6 billion or so. We don't fix a pattern with a ROE that fits within the regulatory frame work. So I think the answer to your question is you know, we think that's fine at this point in time. To the extent that something wonderful happens, we'll simply deal with that as that occurs.
Paul Patterson - Glen Rock Associates - Analyst
OK and then second question I have for you, Rick, is in terms of the cost cutting and everything, clearly, you guys saw some problems and what have you, and I don't know how else to ask this, but why did you guys come to the conclusion in the third quarter that you know, you had to make this extra push. What was the sort of thinking there? I mean in other words, why didn't you do it earlier if it was that easily achievable what have you -- you might have.
Rick Priory - Duke Energy Corporation - CEO & Chairman
Well Paul, we made major moves in fourth quarter of '02 and the early first quarter of '03, which was two quarters ago. That amounted to nearly $200 million in substantial reductions. We have executed those. Those cost savings are flowing through. As you know, we didn't know for sure where we were with regard to DENA when we hit the third quarter, you know that DENA did not nor did any other merchant plants were not able to deliver a decent third quarter when we began to sense that, that third quarter was a question mark, we simply decided to take the next step and drive out additional costs, resize down the business further from where we originally anticipated, so simply make sure that when we get to the bottom of the cycle here, we can get down to a place where we can remain healthy and just ride out the bottom of the cycle, however long it may be, and so that's the thinking that went into it.
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PREPARED REMARKS AND Q&A Q3 2003 Duke Energy Earnings Conference Call October 30, 2003
Fred Fowler - Duke Energy Corporation - President & COO Paul Patterson - Glen Rock Associates - Analyst
This is Fred, and that's been one of my major efforts this year, so I would like to make a comment. You know, one of the things that you have to do in this process is you have to figure out how do I get the work done? You know, you do one of two things. How do I do it in a way that I get the same amount of work done with less head count?
In your future endeavors.
Rick Priory - Duke Energy Corporation - CEO & Chairman
I have enjoyed working with you.
And secondly, what are the things that I no longer really have to do? So it's not a process of simply that you can just go in and cut heads. You got to have to think of how am I going to reconfigure the workload, as well, so it typically happens more in stages than just saying, hey, all at once, I can come in and cut or reduce work force by 4,000 people.
Paul Patterson - Glen Rock Associates - Analyst
Thank you
Operator
And we will now hear from James Pringle with Giovine Capital Group.
Paul Patterson - Glen Rock Associates - Analyst
So in other words, I guess it was an interim process where you guys kept on finding additional cost cutting that you can do without substantially harming the business? Is that the right way to understand it?
James Pringle – Giovine Capital Group - Analyst
Can you let us know what your dividend plan is for next year, and if you know it can be a little bit more specific than the board's going to review it?
Rick Priory - Duke Energy Corporation - CEO & Chairman
I think you're right on the mark, and we have a history of doing this. That's how we got from running an electric company with 25,000 people down to 10,000 people.
Rick Priory - Duke Energy Corporation - CEO & Chairman
James, what kind of -this is a terrible position to put me in. I have got a successor coming along by the name of Paul Anderson. You know how I feel about the dividend. Paul has spoken publicly about how he feels about the dividend. He has to review the plans that we have currently in hand. We have a series of alternative plans. He is going to pick, I presume, as any good CEO would, the plan that makes the most sense for the company going forward. It's going to take him a couple of months to be able to do that. Until he can do that and then sit down with the Board and make the final choice on the business plan, we just aren't in a position to say anything about the dividend, James.
Paul Patterson - Glen Rock Associates - Analyst
OK Then finally, gas risk, gas risk exposure for that 98% expected hedge production for '04 and the estimated production for the total year of '03, if you can give that to me.
Rob Ladd - Duke Energy Corporation - President, Duke Energy North America
Yes this is Rob, Paul. We're substantially hedged in '04 and the same would apply to the balance of '03. James Pringle – Giovine Capital Group - Analyst
But just as you stated earlier, he has not been as vocal about supporting the current level dividend is that what you're inferring?
Paul Patterson - Glen Rock Associates - Analyst
OK. Excellent. Listen, thank you very much, and good luck to you, Rick. Rick Priory - Duke Energy Corporation - CEO & Chairman
I'm not inferring that at all. The information that I heard from Paul reported by the news agencies went something like this. In fact, I have a quote here. The quote is, “Dividends are important, and you should do everything you can to avoid cutting dividends. Philosophically, I'm a supporter of dividends.” He went on to say,
Rick Priory - Duke Energy Corporation –CEO & Chairman
Thanks, Paul.
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PREPARED REMARKS AND Q&A Q3 2003 Duke Energy Earnings Conference Call October 30, 2003
“When I took the job at BHP, everyone said the first thing I would do is cut the dividend. I never cut the dividend at BHP.” Now do you think that's leaning towards cutting the dividend, I guess you're free to think that opinion, but I would tend to lean the other way.
Maureen Howe - RBC Capital Markets - Analyst
But the one-time reduction brings you back down presumably and presume that's how they did the calculation, to your allowed return?
James Pringle – Giovine Capital Group - Analyst
Ruth Shaw - Duke Energy Corporation - President, Duke Power
All right. Thank you very much.
Again, I think there's some misunderstanding that the quote, unquote, “allowed return” represents a cap, which it does not. It represents a target level. We've earned below that in a number of quarters, and in fact, we earned below it in far more quarters than we have earned above it. The decrement on that 12 month, actually 13-month rolling average will certainly keep us well within that range for that period, and as Rick said earlier, we anticipate at the earnings levels we expect to stay in the range of our allowed returns.
Rick Priory - Duke Energy Corporation - CEO & Chairman
Thanks, James.
Operator
And We'll now hear from Maureen Howe with RBC Capital Markets.
Maureen Howe - RBC Capital Markets - Analyst Maureen Howe - RBC Capital Markets - Analyst Good morning. I have a question about the normalizing adjustment associated with South Carolina. I can appreciate that it may not all be attributable that the charge, the $30 million charge to this quarter, but isn't it appropriate that that should be included in recurring earnings for the year since it, in fact, was a rate reduction?
OK, so I'm still challenged to see why it's, you know, a nonrecurring item.
Rick Priory - Duke Energy Corporation - CEO & Chairman
It’s Rick, Can I take a shot? As I told you, that was a non--what may well be a nonrecurring good news story in the fourth quarter of 2002 and what we would believe to be potentially a nonrecurring good news story in the first quarter of 2003, and so the commission elected to put on a decrement for 12 Months to wash out that blip, and there's no indication necessarily that we will continue to have wonderful blips like that and there's no indication that even if we did, they would necessarily take the same approach. So I don't think there's anything recurring about that.
Ruth Shaw - Duke Energy Corporation - President, Duke Power
This is Ruth Shaw, and I'm president of Duke Power and that is specific in the order from South Carolina a “one-time rate decrement” which has been was fully taken in September.
Maureen Howe - RBC Capital Markets - Analyst
Maureen Howe - RBC Capital Markets - Analyst So, but your rates define an understanding in decrement, and
maybe I don't, were actually reduced? OK, I guess one could take out the positive blip in the first quarter
to offset the negative blip that they gave you in the third, which, expect is that how the commission looked at it?
Ruth Shaw - Duke Energy Corporation - President, Duke Power
That is a one-time rate decrement for a twelve-month period at which point rates return to the previously approved level. Rick Priory - Duke Energy Corporation - CEO & Chairman
I'm not really following you. Rick Priory - Duke Energy Corporation - CEO & Chairman So The fundamental rates remain the same, there's a decrement that subtracts the net rate for 12-month period and then the original rates are reinstated.
Maureen Howe - RBC Capital Markets - Analyst
That's fine. Thank you very much.
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PREPARED REMARKS AND Q&A Q3 2003 Duke Energy Earnings Conference Call October 30, 2003
OK. I appreciate that, and everything else was answered, and just to be a little more specific to an earlier question about your hedges and your gas price risk, I believe, that Mr. Anderson had made a public statement about you being short gas and being exposed to rising prices, and I take it from your answer to an earlier question that you have sold that gas forward and locked in a spread and so you're no longer at risk?
Rick Priory - Duke Energy Corporation - CEO & Chairman
Thank you.
Operator
We'll now hear from Carol Coale, Prudential.
Rob Ladd - Duke Energy Corporation - President, Duke Energy North America Rick Priory - Duke Energy Corporation –CEO & Chairman Yes, Carol this is Rob Ladd, as I indicated, we're substantially hedged relative to gas, and although, as you know from previous -- I believe previous discussions that we typically do not buy all of the gas for the production that we expect. We do as we get closer to that period of time, but we do not have all of the gas purchase for the forward periods.
Hello Carol.
Carol Coale - Prudential Securities - Analyst
Hello. Good morning.
Rick Priory - Duke Energy Corporation –CEO & Chairman Carol Coale - Prudential Securities - Analyst Good morning. OK. Thank you and good luck, Rick.
Carol Coale - Prudential Securities - Analyst Rick Priory - Duke Energy Corporation - CEO & Chairman Most of my questions were answered, but I have one left. If you could please give us a little bit more clarification on the cash payment that field services made to Duke Energy, the $87 million. It was related to a settlement, and I wasn't really following if this was or what this cash payment was.
Thank you, Carol.
Operator
Moving on to Ali Agha with Burnham Securities
David Hauser - Duke Energy Corporation - Senior VP & Corporate Treasurer Ali Agha – Burnham Securities - Analyst
Thank you, a couple of questions. First on DENA, could you remind us what is the total capital investment right now in DENA from Duke, and how much of that is goodwill?
Carol, this is David. When we constructed the field services partnership with Conoco Phillips, we set up a preferred stock essentially that is part of the capitalization of that entity, and this was nearly a repayment of a piece of that preferred stock and our share was the $87.5 million.
Robert Brace - Duke Energy Corporation – Executive VP & CFO
Carol Coale - Prudential Securities - Analyst The total capital employed at DENA is approximately $8 billion, and there's no goodwill.
So this was a one-time event. So shouldn't we treat that as a nonrecurring item in field services, or did it not affect income? Ali Agha – Burnham Securities - Analyst David Hauser - Duke Energy Corporation - Senior VP & Corporate Treasurer
No goodwill.
Well, yes, that's cash. That is not income. Robert Brace - Duke Energy Corporation – Executive VP & CFO
Carol Coale - Prudential Securities - Analyst
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PREPARED REMARKS AND Q&A Q3 2003 Duke Energy Earnings Conference Call October 30, 2003
No remaining goodwill.
Ali Agha – Burnham Securities - Analyst Ali Agha – Burnham Securities - Analyst
OK, and last question, as it relates to the DENA in 2004 right now, there has been anecdotal evidence that we're heading from other merchant producers that there is a high level of activity going on right now in terms of potentially looking forward to medium and long-term contracts. You mentioned you haven't seen much at all in the third quarter, could you comment on what you are seeing in the market out there vis-à-vis contractual opportunities?
Second question, when you look at the 2004 numbers right now for DENA, looking at the math and the table that you put out there, you are assuming basically that you produced just about as much as you have hedged right now. Does that imply that there are some facilities that are not running at all and there are costs associated with those?
Rob Ladd - Duke Energy Corporation - President, Duke Energy North America
Rob Ladd - Duke Energy Corporation - President, Duke Energy North America
This is Rob again. I think it would be fair to say that our peaking plants next year will run nominally at this point, if at all, so it depends on those plans with combined cycles in certain parts of country expected to produce quite a bit, but others not depending on what region they're in and with the other cycles, it's nominal.
Sorry, I must have misspoken; I meant to indicate that we are seeing a number of opportunities in the tolling area out over time. The number I mentioned before was about $400 million of gross margin over 8 to 10 year period. We have had the opportunity thus far in 2003 to lock in about $65 million of gross margin, again over a number of years period of time. We are seeing those opportunities. They really vary by region. In the west, they can be attractive given the spark spreads there, but in other parts of the country, which are somewhat depressed, the opportunity isn't as great, so frankly, we have been selective. We don't want to lock into low sparks at this period of time.
Ali Agha – Burnham Securities - Analyst
Rob, just to get a sense, what kinds of O&M costs do you incur on those speakers?
Rob Ladd - Duke Energy Corporation - President, Duke Energy North America
Ali Agha – Burnham Securities - Analyst
Thanks. Well, it's fairly modest, but it does involve, we do have property
tax and insurance whether they're operating or not, and then, of course, we have the depreciation charge, as well.
Operator
We'll now hear from Jay Dobson with Deutsche Bank. Ali Agha – Burnham Securities - Analyst
Rick Priory - Duke Energy Corporation - CEO & Chairman Right. So how much is that run annually?
Hello Jay.
Rob Ladd - Duke Energy Corporation - President, Duke Energy North America
Jay Dobson - Deutsche Bank - Analyst
Run annually? Hello, how are you, Rick?
Ali Agha – Burnham Securities - Analyst Rick Priory - Duke Energy Corporation - CEO & Chairman
Yes. Good.
Rob Ladd - Duke Energy Corporation - President, Duke Energy North America Jay Dobson - Deutsche Bank - Analyst
Two questions, if I can. On the CAPEX cuts, can you detail where the $400 million came from and just give us a sense if there's sort
I don't think I can give you the exact number, but I will follow up with you.
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PREPARED REMARKS AND Q&A Q3 2003 Duke Energy Earnings Conference Call October 30, 2003
17
of any additional we can expect going forward. I know we're limping toward the tail end of 2003 here, so I guess it is sort of looking out toward 2004. And then second, I was wondering if Robert could detail for us, in the $1.20 to $1.25 EPS, I assume that continues to include the asset gains booked in the second quarter, so if we can sort of look at maybe what '03 sort of recurring earnings will be under your forecast looking out into '04 or as a base for '04.
Rick Priory - Duke Energy Corporation - CEO & Chairman
The $1.20, $1.25 has all gains and losses netted out of it. It's an ongoing number.
Jay Dobson - Deutsche Bank - Analyst
Completely clean of everything booked earlier this year?
Rick Priory - Duke Energy Corporation - CEO & Chairman
Stripped clean of anything earlier booked this year. Basically when you look at the CAPEX coming up that last increment of CAPEX was another couple of hundred million dollars. We see little bit of it coming out of franchise electric but a good bit out of gas transmission a bit out of Crescent Resources and a good bit out of others as well. So, franchise electric primarily was driving the latest increment of $200 million the earlier increment of $200 million. I just don't have that information exactly what that distribution was.
Jay Dobson – Deutsch Bank - Analyst
It was more across the board?
Fred Fowler – Duke Energy Corporation – President & COO
That also heavily weighted for franchise electric and gas transmission because that is a big gap in our correlation.
Jay Dobson – Deutsch Bank – Analyst
Was that? Does it get it pre, Fred?
Fred Fowler – Duke Energy Corporation – President & COO
Yes, exactly I have on the $400 million. Just wonder looking forward and the ability to take that down even further. Well, we know we have given some guidance back I think in the early part
of the year with regard to anticipated capital and you know we were asking for guidance just probably reasonably on tracks with the exception that we have made some with the short cut. So, approximately it will be lower than.
Jay Dobson - Deutsche Bank - Analyst
OK, great thank you.
Rick Priory - Duke Energy Corporation - CEO & Chairman
Thanks James
Operator
And unfortunately that is all the time that we have today for questions. I will turn the conference back to Mr. Ebel for any closing additional remarks.
Greg Ebel - Duke Energy Corporation - VP, Investor and Shareholder Relations
Well, let me thank you for your time, and interest in Duke Energy. I will wrap up by reiterating that while the quarter, from an earnings perspective, did not come in as we had expected we are very pleased and bolstered by the progress we have made on net debt reduction - reaching some $1.7B at Duke Energy and in excess of that at Duke Capital. We are extremely pleased by our progress on the asset divestiture plan where we have now exceeded our target by more than 3 times. And, of course, the cost reduction initiative that we discussed with you today which will provide some $200M in pre-tax benefits to the company in 2004. With that, we look forward to following up with you to answer any questions you may have over the coming days, and I and the rest of the investor relations team are available to take your call.
Operator
That does conclude today's conference. On behalf of Duke Energy and Premier Conference we will thank you for your participation.